Texas Insurance Law Newsbrief - September 12, 2023
INSURED’S MOTION TO COMPEL APPRAISAL WASHED AWAY BY COVERAGE ISSUES INVOLVING A LATENT SHOWER DEFECT
The Southern District of Texas recently denied an insured’s motion to compel appraisal in a property damage lawsuit after reviewing the insurer's response contesting coverage.
In Benitez v. AmGuard Ins. Co., No. 4:22-CV-03619 (S.D. Tex. Aug. 24, 2023), Rodolfo Benitez sued AmGuard Insurance Company alleging underpayment of his claim for water damage beneath a recently remodeled shower.
AmGuard argued the policy excluded coverage for latent defects like the shower leak. In its response to the insured’s motion to compel appraisal, AmGuard provided details on its investigation and denial, finding no coverage due to the defect exclusion and the insured’s pre-suit statements. AmGuard argued appraisal was improper absent a covered loss. Persuaded by AmGuard's coverage defense, the court held appraisal could not be compelled when the fundamental dispute concerned coverage, not valuation.
Editor's Note: MDJW attorneys Christopher Martin, Jamie Cooper and Paul Bishop had the privilege of representing AmGuard Insurance Company in this lawsuit and congratulates them on this significant win.
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NO DUTY TO INDEMNIFY INSUREDS WHEN THEY CHOOSE THEIR OWN COUNSEL WITHOUT A VALID CONFLICT
The Ninth Court of Appeals in Beaumont recently examined whether an insurer had a duty to reimburse defense costs incurred by attorneys chosen by the insureds, when the insurer offered to defend under a reservation of rights.
In, Mid-Continent Casualty Co. v. Harris County Municipal Utility District No. 400, No. 09-22-00252-CV (Tex. App.—Beaumont Aug. 31, 2023, no pet. h.) (slip op.), in the underlying suit, Edgar Clayton filed an election contest challenging the outcome of a municipal utility district board election. Clayton sued the district (MUD 400) and two of its directors, Anne Marie Wright and Cheryl Smith. The district and directors were insured under a D&O policy issued by Mid-Continent Casualty Company. Mid-Continent offered to defend the insureds under a reservation of rights, citing a policy exclusion for claims involving an insured gaining an advantage to which they were not legally entitled. The insureds rejected Mid-Continent's offered defense counsel and chose their own attorneys, incurring over $150,000 in fees.
After the underlying suit was dismissed, the insureds sought reimbursement from Mid-Continent for their defense costs. Mid-Continent denied the claim, arguing it had no duty to reimburse costs for attorneys it did not select. The insureds then sued Mid-Continent alleging wrongful denial of their claim. Mid-Continent moved for summary judgment, reiterating it had no duty to pay for attorneys not chosen by the insurer. The trial court denied summary judgment, finding Mid-Continent owed a duty to reimburse the insureds' defense costs.
On appeal, the Court examined whether a conflict of interest existed that would allow the insureds to select independent counsel. The court concluded the election contest pleadings did not allege the insureds gained a monetary advantage, so the facts underlying coverage were not the same as those to be adjudicated. The court also found no conflict between the insureds requiring separate counsel. Given the lack of conflict, the Court held Mid-Continent had no duty to reimburse the insureds' independently incurred defense costs. Accordingly, the court reversed and remanded the case to the trial court for further proceedings.
Editor's Note: MDJW Founding Partner, Christopher Martin had the privilege of representing Mid-Continent Casualty Company in this lawsuit and congratulates them on this significant win.
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NO NEED TO REMAND WHEN LACK OF FACTUAL ALLEGATIONS AGAINST NONDIVERSE AGENT SHOW JOINDER A SHAM
The Southern District of Texas examined issues of diversity jurisdiction and improper joinder in a breach of contract case removed from state court.
In Maverick Field Services v. eMAXX Insurance Services, LLC, No. H-23-2513, 2023 WL 5803704 (S.D. Tex. Sept. 7, 2023), Maverick Field Services sued various entities and individuals in Texas state court over a dispute regarding a captive insurance policy purchased through defendants eMAXX Insurance Services and eCAPTIV. Maverick alleged that one defendant made misrepresentations about the policy, leading Maverick to pay premiums which were then not available when Maverick later sought to recover under the policy. eMAXX removed the case to federal court based on diversity jurisdiction, arguing that the sole nondiverse defendant, Chris Batten Insurance, Inc. (CBI), was improperly joined solely to defeat federal jurisdiction.
Maverick moved to remand, contending CBI was properly joined and that eMAXX's notice of removal failed to adequately allege diverse citizenship. The district court denied remand, finding the pleadings stated no claim against CBI, reflecting improper joinder. The court also allowed eMAXX to amend its notice of removal to properly establish diverse citizenship between the parties.
The court applied Fifth Circuit precedent governing improper joinder analysis, permitting a Rule 12(b)(6)-like examination of whether a complaint potentially states a claim under state law against a nondiverse defendant. As Maverick pled no facts regarding CBI's role in the dispute, the court concluded CBI was improperly joined.
Further, the court held that eMAXX could amend its defective allegations of citizenship jurisdiction under 28 U.S.C. § 1653. Although eMAXX's original notice failed to adequately plead the citizenship of the LLC defendants, it provided enough evidence of diverse citizenship to allow amendment curing the technical defect.
Editor's Note: This decision demonstrates federal courts' focus on the pleadings in evaluating improper joinder and their leniency in allowing jurisdictional amendments, underscoring the high bar for remand when a diverse defendant removes a state court case and the allegations against the only nondiverse party are conclusory.
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PLEADINGS TOO AIRY FOR STANDING AS BENEFICIARY: COURT ALLOWS POTENTIAL BENEFICIARY TO REPLEAD
The Southern District of Texas recently examined whether a prior insurance beneficiary had standing to challenge his replacement and whether he adequately pled related fraud and unjust enrichment claims.
In Marion v. Principal Life Insurance Co., No. H-23-0150, 2023 WL 5761287 (S.D. Tex. Sept. 6, 2023), Tommy Marion sued Principal Life Insurance Company and Nicky Thompson after the insured died and Principal paid policy benefits to Nicky Thompson instead of Marion. Marion alleged he was the original beneficiary but Thompson fraudulently submitted a change of beneficiary form naming himself as sole beneficiary.
The court found Marion lacked standing because he only referenced one change removing him as beneficiary, while the record showed two separate changes, with Marion removed in the first. Since Marion did not challenge the first change in the alleged chain of fraud, the court held he failed to show he was still the proper beneficiary. The court also found Marion's fraud and forgery allegations deficient under Rule 9(b) for omitting details of when and where the alleged fraudulent change occurred. Further, Marion failed to plead any reliance to support his fraud claim under Texas law.
However, the court granted Marion leave to amend, given the early stage of the case, telegraphing any amended complaint must allege Marion's standing to challenge both beneficiary changes and comply with Rule 9(b).
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DISCOVERY RULE FAILS TO BAIL COMMERCIAL FLOOD CLAIMANT AGAINST INSURER IN TIME-BARRED HURRICANE HARVEY DISPUTE
The Eastern District of Texas examined the timeliness of property damage claims related to Hurricane Harvey flooding in 2017 and found that an exception to the statute of limitations based on the Discovery Rule, did not apply.
In Tri-Con, Inc. v. Union Pacific Railroad Co., No. 1:20-CV-535, 2023 WL 5746920 (E.D. Tex. Sept. 6, 2023), Tri-Con and its insurer sued Union Pacific in 2020 for flood damage to Tri-Con's property, and other claims allegedly caused by Union Pacific's negligence. The court referred Union Pacific's motion for summary judgment to a magistrate judge.
The magistrate judge recommended dismissing Tri-Con's Hurricane Harvey claims as barred by the two-year statute of limitations. Though Tri-Con argued the Discovery Rule should apply, the judge held the rule only tolls limitations until an injury is discovered, not until the cause is known. Reviewing the recommendation de novo, the district court overruled Tri-Con's objections. The court agreed the Discovery Rule did not save the Harvey claims since Tri-Con knew of the flooding when it happened in 2017, well over two years before suit was filed. Thus, the court adopted the recommendation and dismissed the Hurricane Harvey claims as untimely filed. The remaining claims survived summary judgment.
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NO ERISA PLAN DETAILS, NO PROBLEM - COURT ALLOWS ERISA AND STATE LAW CLAIMS AGAINST INSURER IN PROVIDER REIMBURSEMENT DISPUTE
The Western District of Texas largely denied an insurer's motion to dismiss claims asserted by an out-of-network emergency facility over reimbursement for treating the insurer's policyholders.
In Lone Star 24 Hr ER Facility, LLC v. Blue Cross & Blue Shield of Tex., No. SA-22-CV-01090-JKP, 2023 WL 5729947 (W.D. Tex. Sept. 5, 2023), Lone Star alleged Blue Cross Blue Shield of Texas systematically underpaid claims, violating its ERISA plan obligations and Texas insurance law duties. The court dismissed unnamed patient plaintiffs for violating the real party in interest rule.
However, the court allowed Lone Star to proceed on its ERISA benefits claim despite lacking plan details, following Fifth Circuit precedent. The court also permitted state law claims, finding Lone Star adequately pleaded insurance code violations as an assignee. Thus, the court declined to dismiss the ERISA and state law claims against the insurer at the pleading stage based on the alleged systemic under-reimbursement.
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FAILURE TO PRESERVE ERROR RESULTS IN NO BASIS FOR REVERSAL
The Fifth Circuit examined whether an insurer had a duty to defend or indemnify an insured mortgage servicer against claims asserting improper charges and misrepresentation related to a reverse mortgage.
In Nassar v. Finance of America Reverse, L.L.C., No. 22-20256, 2023 WL 5767475 (5th Cir. Sept. 6, 2023), Elie Nassar took issue with the finance company and others for obtaining and charging hazard insurance, declaring his mortgage loan in default, assessing foreclosure-related expenses, and allegedly making misrepresentations. Nassar sued Finance of America Reverse (FAR), Reverse Mortgage Solutions (RMS), and CELINK, asserting breach of contract, fraud, and violations of the Texas Debt Collection Act regarding his reverse mortgage. At trial, the defendants denied any contractual breaches or misrepresentations, providing evidence of the propriety of their actions per the reverse mortgage agreements and applicable HUD guidelines. The jury agreed and found in favor of the defendants.
On appeal, Nassar challenged the sufficiency of the evidence supporting the defense verdict. However, he failed to properly preserve these evidentiary issues via a Rule 50(a) motion, so the Fifth Circuit reviewed only for plain error and found ample evidence supporting the jury's findings. Nassar also asserted errors regarding his expert's excluded testimony, the exclusion of RMS' bankruptcy evidence, and the denial of his motion to amend the complaint. The Fifth Circuit found no reversible error on these points.
Additionally, Nassar challenged the jury instructions and verdict forms, but the Fifth Circuit held the district court acted within its discretion given the pleadings, evidence presented, and applicable law. The court also rejected Nassar's contentions of improper closing arguments by the defense, discerning no plain error.
Accordingly, the Fifth Circuit affirmed the judgment entered upon the jury's defense verdict, discerning no grounds to disturb the outcome. The court reiterated the high thresholds for plain error and abuse of discretion review, and emphasized the wide latitude afforded to district courts in making evidentiary, procedural, and instructional decisions.
Editor's Note: This decision illustrates the substantial burden faced by appellants, equally applied to pro se litigants like Nassar, in demonstrating reversible error under deferential standards of review. Absent properly preserved issues for closer examination, the deck is stacked against overturning a jury's verdict supported by some evidence.
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